Faqa Ltd acquired 100% of the shares of Kalu Ltd on 1 July 2017 for $600 000,
Question:
Faqa Ltd acquired 100% of the shares of Kalu Ltd on 1 July 2017 for $600 000, when the equity of Kalu Ltd consisted of:
Share capital $450 000
General Reserve 70 000
Retained earnings 45 000
Asset revaluation reserve 10 800
All identifiable assets and liabilities of Kalu Ltd are recorded at fair value at this date except for inventories for which the fair value was $10,000 greater than carrying amount, and plant which had a carrying amount of $150,000 (net of $40,000 accumulated depreciation) and a fair value of $170,000. The inventories were all sold by 30 June 2018, and the plant had a further 5-year life with depreciation based on the straight-line method.
Financial information for both companies at 30 June 2020 is as follows:
| Faqa Ltd | Kalu Ltd |
| $ | $ |
Sales Revenue | 720,000 | 530,000 |
Other Revenue | 240,000 | 120,000 |
| 960,000 | 650,000 |
Cost of Sales | -610,000 | -410,000 |
Other Expenses | -230,000 | -160,000 |
| -840,000 | -570,000 |
Profit before Tax | 120,000 | 80,000 |
Tax Expenses | -40,000 | -25,000 |
Profit for the period | 80,000 | 55,000 |
Retained Earnings at 1/7/19 | 200,000 | 112,000 |
| 280,000 | 167,000 |
|
| |
Dividend Paid | -20,000 | -10,000 |
Dividend Declared | -25,000 | -15,000 |
| -45,000 | -25,000 |
Retained Earnings at 30/6/20 | 235,000 | 142,000 |
Share Capital | 600,000 | 500,000 |
Asset Revaluation Surplus | 20,000 | 60,000 |
General Reserve | 80,000 | 100,000 |
Total Equity | 935,000 | 802,000 |
Dividend Payable | 25,000 | 15,000 |
Other Liabilities | 25,000 | 25,000 |
Total Liabilities | 50,000 | 40,000 |
Total equity and liabilities | 985,000 | 842,000 |
Receivables | 40,000 | 30,000 |
Inventory | 100,000 | 170,000 |
Plant & Equipment | 200,000 | 500,000 |
Accumulated Depreciation | -115,000 | -88,000 |
Land at Fair Value | 80,000 | 80,000 |
Shares in Kalu Ltd | 600,000 | - |
Deferred Tax Assets | 50,000 | 40,000 |
other assets | 30,000 | 110,000 |
Total Assets | 985,000 | 842,000 |
|
|
|
* The Balances of the surplus at 1 July 2019 were $35000 (Faqa Ltd and $50000 (Kalu Ltd) |
The following transactions took place between Faqa Ltd and Kalu Ltd:
a) During the 2019-20 period, Kalu Ltd sold inventory to Faqa Ltd for $23 000, recording a profit before tax of $3 000. Faqa Ltd has since resold half of these items.
b) During the 2019-20 period, Faqa Ltd sold inventory to Kalu Ltd for $18 000, recording a profit before tax of $2 000. Kalu Ltd has not resold any of these items.
c) On 1 June 2020, Kalu Ltd paid $1000 to Faqa Ltd for services rendered.
d) During the 2018-19 period, Kalu Ltd sold inventory to Faqa Ltd. At 30 June 2019, Faqa Ltd still had inventory on hand on which Kalu Ltd had recorded a before-tax profit of $4000.
e) On 1 July 2018, Kalu Ltd sold plant to Faqa Ltd for $150 000, recording a profit of $20 000 before tax. Faqa Ltd applies a 10% p.a. straight-line method of deprecation in relation to assets.
Required:
a) Prepare the consolidation worksheet entries for Faqa Ltd for the year ended 30 June 2020. Assume an income tax rate of 30%.
b) The accountant for Bingo Ltd, Ms Diva, has sought your advice on an accountancy issue that has been mystifying her. When preparing the acquisition analysis relating to Bingo Ltd’s acquirement of Tasha Ltd, she calculated that there was a gain on bargain purchase of $10,000. Being unsure of how to account for this, she was informed by accounting colleagues that this should be treated as income. However, she figured that this would influence the consolidated profit in the first year after the acquisition date. For example, if Tasha Ltd reported a profit of $50,000, then consolidated profit would be $60,000. She is unsure of whether this profit is all post-acquisition profit or a mixture of pre-acquisition profit and post-acquisition profit. Compile a detailed report on the nature of excess, how it should be accounted for, and the effects of its recognition on subsequent consolidated financial statements.
Fundamentals of Advanced Accounting
ISBN: 978-0077667061
5th edition
Authors: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik